Q4’12 Australian CPI — Low enough for a cut

The Q4’12 inflation data was a little lower than most expected, with the core ~0.55%qq (mkt median was ~0.7%qq). This is high enough to make it unclear if the RBA will cut in Feb, but low enough to make it a good chance.

The Q4’12 number is more useful than is usual for a single quarterly print. I would say it is about twice as useful as the average print — as not only does us tell us about inflation in Q4, but it also helps to separate the signal from the noise in the Q3’12 report.

For, while the underlying inflation pulse in Q3 appeared to be a high 0.75%qq, we know some of that was due to the policy changes in Q3 (which it is more accurate to say increased the cost of living, rather than inflation).

Seeing the next data point helps to identify the trend – now we have seen it, it looks to me that trend inflation was ~0.5%qq for all of 2012, including H2’12.

This is consistent with the RBA’s judgement that core inflation would be boosted by around 25bps in H2’12 (subtracting 25bps from the yoy pace of ~2.3% and 50bps from the 2Q annualised pace of ~2.6% gets you ~2.1%).

It is, however, ~25bps below the RBA’s Q4 SOMP inflation forecasts of 2.5%yy for both headline and core. The old rule of thumb is to do 1.5x the inflation surprise, so this certainly leaves the door wide open for further cuts.

I think Feb seems likely – domestic demand data hasn’t been very good, and I sure would vote for it – but it is no sure thing.

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